United Utilities is starting to put the building blocks in place enabling it to carry out the direct procurement of large scale capital investment projects worth between £100 million to £500 million whole life cost.

The utility has given notice of its intention to engage with external service providers for capital delivery specialist legal services in relation to a large scale capital investment project.

The likely scale of any future project is anticipated in the region of £100 million to £500 million whole life cost. United Utilities said it would be looking to engage specialist legal firms capable of working in a project team environment to deliver the legal structure that will allow it to formally engage with the market to design, build, operate, maintain and financing of a proportion of its future network.

Information the water company is asking interested suppliers to provide includes one or more case studies demonstrating previous contracts of a similar nature.

Ofwat will encourage water companies to use direct procurement for suitable high value projects in PR19 business plans

The regulator first flagged up its intention to make greater use of market forces for the procurement of large-scale infrastructure investment in its Water 2020 methodology consultation in December 2015. Ofwat set the expectation that, for PR19, all companies should consider direct procurement for all discrete, large-scale enhancement projects (excluding sludge) with a value of more than £100 million.

Its subsequent paper published in May 2016 setting out its Water 2020 regulatory approach said that under a direct procurement framework, water companies will seek bids from third parties, with service providers competing to provide finance as well as construction and, where appropriate, operation of the new asset. The onus will be on companies to demonstrate they have the best solution in their business plans.

Ofwat’s vision is for companies to approach each discrete large-scale enhancement project by first asking: “What is the best way to deliver this for customers?” and then exploring the possible options, including direct procurement. In the upcoming Price Review in 2019 companies will need to justify why they have not used direct procurement for any projects above the guideline threshold.

The regulator has highlighted the £4.2 billion Thames Tideway scheme as demonstrating the potential benefits of procuring independent providers. 

Ofwat says that evidence based on capex costs associated with particular schemes suggests that direct procurement could be used for around 2% of the total value of the water and wastewater value chain.

Under its approach to PR19 the guideline threshold will be set as whole-life totex, rather than capex, meaning more schemes will qualify above the £100 million guideline threshold when using wholelife totex.

Large enhancement projects in the 2014 price review which could potentially have been carried out via direct procurement included:

• Severn Trent Water Birmingham resilience main scheme - £265m
• United Utilities Thirlmere and West Cumbria - £215m
• Thames Water Counters Creek sewer flooding scheme £257m

Large enhancement projects in the 2009 price review which began in AMP5 included:

• Thames Water Lee Tunnel - £555m
• Thames Water Deephams STW - £264m AMP5-AMP6 overlap project
• Southern Water Brighton & Hove STW - £192m
• Wessex Water Integrated supply grid - £271m AMP5-AMP6 overlap project
• United Utilities Vyrnwy LDTM cleaning - £172m AMP5-AMP6 overlap project

The anticipated date for the publication of United Utilities' contract notice to procure specialist legal services is 4^th June 2018. Click here to access the Periodic Indicative Notice for further information about United Utilities’ legal services requirement.